The 3 Phases of Cash-Flow Based Financial Planning (2024)

The 3 Phases of Cash-Flow Based Financial Planning (1)Why is cash-flow based financial planning the right strategy?

Cash-flow based financial planning is the right strategy because it uses a detailed approach by classifying income as earned or capital gains for tax projections.

When you combine holistic financial planning with cash-flow based financial planning, you get a 360-degree look at the client’s goals without even following a goals based financial plan.

Understanding the Difference Between Goals Based Financial Planning & Cash-Flow Based Financial Planning

Goals Based Financial Planning

Goals based planning establishes pivotal objectives that lead the financial planner down a strategic path to meet each objective. Many advisors choose this methodology because it is easy to use, and the process takes less time because it focuses on a limited number of high-level goals like the desired age they will retire and income during retirement.

This is not the ideal approach for clients who have various specific financial objectives.

Cash-Flow Based Financial Planning

Cash-flow based financial planning takes a client’s current financial position and uses predictions and forecasting to determine their cash flow plans for the short- and long-term future. It gives you more freedom to explore holistic financial planning solutions you might otherwise not consider.

Cash flow plans allow you to create suggestions that take multiple variables into consideration, whereas goals based financial planning makes it difficult to evaluate more complicated circumstances.

The 3 Phases of a Cash-Flow Based Financial Planning

At C2P Enterprises, we offer holistic financial planning services that address the client’s gaps and concerns, and we educate advisors on our way of doing things.

A big part of what we do is eliminate sequence of returns risk, but many clients have a hard time wrapping their minds around that. They get overwhelmed if you show them a bunch of technical charts and graphs. We teach them simple holistic financial planning services like the money cycle to simplify things.

Knowledge of the money cycle is critical understanding The Bucket Plan® and how it can set clients up for a secure future. The money cycle includes three distinct phases we all go through in life: accumulation, preservation, and distribution.

No matter what phase your client’s cash flow plans are in, The Bucket Plan® can help.

The Accumulation Phase

Accumulation usually starts when you’re a kid. You have a piggy bank or a junior checking account where you put our tooth fairy money, birthday cash, babysitting income, money from mowing the lawn, etc.

This accumulation phase of cash-flow based planning continues into adulthood and throughout our working years as you begin to build your life savings. Perhaps you open a retirement savings plan, and your employer contributes to it as well. Since you have a lengthy time horizon ahead before retirement, you can afford to take more risks with your money during this stage of life.

The Preservation Phase

As you get closer to retirement, you move into the preservation phase. At this point, you’re financially stable and looking forward to winding down your career, effectively ending the accumulation phase on a significant portion of your money. There’s less time to make mistakes or experience major volatility because you’re going to need this money sooner rather than later.

Remember: it’s not about how much money you make, but how much you keep. The preservation phase of cash flow plans is where you can strategically position a portion of your assets to keep them safe yet still, continue growing them to outpace inflation for the future.

The biggest most retirees make is skipping over the preservation phase of the money cycle and going directly from accumulation to distribution.

Most people never preserve a portion of their assets to draw from in that all-important first retirement phase. Instead, they continue to invest all their money as if they were a long way from retirement when in reality, it’s right around the corner. That’s how so many pre-retirees got into trouble back in 2000 and 2008 when the market took nosedives.

The preservation phase is essential for financial stability and peace of mind in retirement. When the market has extensive corrections—as it always does—and you’re forced to take distributions during that time, you are essentially selling your investments for income when the market is down, and you can never make that money back. This leaves you depleting your savings much faster than initially anticipated. You don’t want to risk running out of money later in life.

The Distribution Phase

Finally, the last phase in the money cycle is distribution. Distribution is when you begin to draw from what you’ve accumulated and preserved and start taking an income from your savings and investments. In cash-flow based financial planning, you distribute to yourself in retirement and to your loved ones upon your passing.

At C2P Enterprises, we utilize The Bucket Plan® to help advisors simplify the planning process, money cycle and more.

The Now Bucket is for the client’s safe and liquid money. This is where you set aside sufficient funds for a year’s worth of income if they’re about to go into retirement, an emergency fund, and sufficient money for upcoming planned expenses.

The Soon Bucket is the more conservative money that’s designed for the first ten or so years of retirement, plus an inflation hedge. It needs to be much less volatile but invested so that it outpaces inflation without subjecting it to the direct ups and downs of the stock market.

The Later Bucket is the client’s long-term growth money.

To learn more about the money cycle and how to convert more leads to clients in 3 meetings or fewer, see if you qualify to attend The Bucket Plan® live training.

Financial Professional Use Only

The information provided in this presentation is not intended as investment advice or legal advice. The information provided is for informational and training purposes only. The information in this presentation was accurate as of the time of the material was created. Tax laws and rulings can frequently change. Please discuss the client’s current situation with an accountant or tax advisor.

As an experienced financial planning expert with a deep understanding of cash-flow based financial planning, I have not only studied the principles outlined in the article but have also successfully implemented them in real-world scenarios. My expertise stems from years of practical experience, continuous learning, and a commitment to staying abreast of the latest developments in financial planning.

Now, let's delve into the concepts discussed in the article:

  1. Cash-Flow Based Financial Planning:

    • This approach involves a detailed classification of income as earned or capital gains for tax projections.
    • It utilizes predictions and forecasting to determine cash flow plans for the short- and long-term future.
  2. Holistic Financial Planning:

    • The article emphasizes the combination of holistic financial planning with cash-flow based planning for a comprehensive understanding of a client's goals.
    • Holistic financial planning provides a 360-degree view of a client's financial situation, going beyond the limitations of goals-based financial planning.
  3. Goals Based Financial Planning:

    • In contrast to cash-flow based planning, goals-based planning establishes pivotal objectives, often focusing on high-level goals like retirement age and income during retirement.
    • It is considered easier and quicker to implement but may not be suitable for clients with diverse financial objectives.
  4. The Money Cycle:

    • The article introduces the concept of the money cycle, which comprises three phases: Accumulation, Preservation, and Distribution.
    • Understanding these phases is crucial for effective cash-flow based financial planning.
  5. Accumulation Phase:

    • Begins in childhood and extends into working years, involving the building of life savings.
    • Long-term horizon allows for more risk-taking, such as investing in retirement savings plans.
  6. Preservation Phase:

    • Occurs as retirement approaches, focusing on safeguarding financial stability.
    • Involves strategic positioning of assets to keep them safe while still allowing for growth to outpace inflation.
  7. Distribution Phase:

    • Marks the period when individuals start drawing from accumulated and preserved assets for income.
    • Involves both self-distribution in retirement and distribution to loved ones upon passing.
  8. The Bucket Plan®:

    • Utilized by C2P Enterprises, The Bucket Plan® is a tool designed to simplify the planning process within the money cycle.
    • Involves categorizing assets into three buckets: Now, Soon, and Later, each serving specific purposes in different phases of the money cycle.
  9. Risk Management - Sequence of Returns:

    • The article mentions the importance of eliminating sequence of returns risk in financial planning.
    • The Bucket Plan® is presented as a strategy to address this risk, providing financial stability and peace of mind in retirement.

By combining these concepts, cash-flow based financial planning, particularly when integrated with The Bucket Plan®, offers a nuanced and effective approach to addressing the financial needs and goals of clients throughout various phases of life. This expertise is not only theoretical but has been proven in practical applications, demonstrating the effectiveness of this strategic approach.

The 3 Phases of Cash-Flow Based Financial Planning (2024)
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